Will Salesforce IPO Float All Boats?

The software-on-demand industry hopes a sizzling offering will juice
up the sector.

Interest is high in salesforce.com's initial public offering.

On Tuesday, it raised the expected opening price a second time, from a high of $8.50 per share to $11, in expectation of raking in around $110 million dollars.

The San Francisco-based provider of hosted customer relationship and
sales force management applications is slated to launch on the New York Stock Exchange under the ticker symbol CRM.

Two other software-on-demand companies are in quiet periods in advance of
their own offerings, and couldn't express their anticipation. RightNow
Technologies, provider of applications for customer service and call
centers, and WebSideStory, which offers Web traffic analytics tools, have
registered with the SEC their intent to go public.

In the software-as-service model, customers typically pay a flat monthly
subscription fee to use applications as much as they want; access is via a
Web interface. Their data resides in secure partitioned servers maintained
by the vendor.

Vendors provide software upgrades and enhancements at no
extra charge, freeing customers from having to maintain applications and servers. Application service providers (ASPs), hosted applications, utility
computing and software on-demand all refer to variations of the model.

The rising tide of excitement could float competitors' boats -- in more ways than one.

First, of course, is the investment it could draw. Tom Taulli, author of "Investing in IPOs," said there's a lot riding on salesforce.com's success.
"VCs are not very smart," said Taulli, who also is a principal in investment
firm Bridgewater Capital. If salesforce.com has a strong showing, he said,
"They'll probably say, "Let's start funding applications as services
companies. That's where the market is going.'"

Even though software-on-demand is unproven for large enterprise
customers, Taulli said, for investors, perception is important. "It might
encourage VC and angel activity, maybe even convince some companies to
transition their business models. It could have significant impact."

Sheryl Kingstone, Yankee Group analyst, said she wishes salesforce.com's public offering well. "A negative IPO will put a damper on a very new type of technology that's just getting off the ground," she said. Kingstone finds hosted
applications a viable option for plenty of businesses. "It's not for
everyone," she said, "but so what?"

At the same time, all the buzz could be seen as the official kick-off to
the "end of software" concept that salesforce.com relentlessly touts.

"[The IPO] signals the beginning of this new software industry," said
Steve Kusmer, CEO of Atomz. "It's a sign of how the industry is moving
forward." Atomz' On-Demand Web Site Solutions include search, content
management, online marketing and promotions functions.

On-demand players like Atomz and salesforce.com love to talk trash about
the on-premise software providers. And they're taking this opportunity to
pile it on. "Companies like Vignette, Siebel, PeopleSoft are the
dinosaurs," Kusmer said. "Our companies are the mammals. We're warm-blooded
and evolving a lot faster than those folks."

Mike Doyle, CEO of Salesnet, said the company would be "firmly on the
sidelines with our pompoms raised for Salesforce.com to have a successful
offering." Salesnet is another provider of Web-based CRM.

While Salesnet isn't contemplating going public until next year, Doyle
said salesforce.com's offering will act as a bellwether.

"The intriguing thing about all this is what the [price-to-earnings]
multiple the public will give recurring revenue, as opposed to the hit and
miss of traditional software revenues," he said. Software [on-demand
providers book income from subscriptions every month, while traditional
software license revenue typically is booked no more than once a year. "Our
bet is the public will give a higher value to a revenue stream that is
predictable, rather than the hit-or-miss sort of drive-by sales," he said.

Wake Up Call For The Industry

Indeed, while the jury is out on whether on-demand is a revolution in the
software industry, this spate of IPOs is certainly a wake-up call for
investors.

In April, investment bank Merrill Lynch launched
an On Demand Index, telling customers, "On Demand practices will change the
way customers buy, vendors sell, and investors invest." The index of 75
companies tracks what percentage of licensing revenues come from
subscriptions versus traditional licenses in order to help investors
understand how this model will change the software industry.

Wall Street will have to learn new ways to value these companies, Merrill
cautioned. The bank told investors to look carefully at deferred revenue
and cash flow, instead of focusing on the company's income statement.

"For vendors, the longer-term viability of the model is predicated on
strong annualized contract value renewal rates," the Merrill Lynch note
said. "This is very important because, without a strong renewal rate, the
On-Demand model simply masks a longer-term slowdown in bookings."

Investors should take note that salesforce.com -- and the sector as a
whole -- will endure cutthroat competition. Niche players will slash prices
while heavyweights muscle in. According to Forrester Research, Siebel
CRM OnDemand should reach feature parity with salesforce.com in six to nine
months, while SAP is likely to enter the game.

While salesforce.com may have drawn customers away from the packaged
software business, smaller companies are nipping at its heels, offering to
migrate customer' data from salesforce.com to their services free, then
charging less.

SalesJunction.com, a competing provider of hosted CRM services, will up
the ante next Monday when it introduces SalesJunction Professional, an
offering that adds collaboration features and automated e-mail follow-up via
templates. Company president Paul Luby said the product easily scales up to
thousands of users -- and it costs just $15 per month per seat.

"[Salesforce.com] is very vulnerable on the price point," Luby said.
"They'll get competitive pressure from us and others. They'll get hurt down
the line, because no way can they keep that price point."

"Everyone is jumping onto the space," said Yankee Group's Kingstone. Siebel Systems , Oracle and IBM already have various flavors of on-demand offerings, with Siebel
CRM OnDemand armed to take a bite out of salesforce.com. IBM declined
to comment for this story.

Siebel, long the butt of salesforce.com's advertising, is moving
aggressively into software as service, said Ken Rudin, vice president and
general manager for Siebel CRM OnDemand. But Rudin said it's not about the
delivery method. It's about how customers want their applications. "I'm
agnostic. We can provide CRM solutions under any model they want. I see the
market going to hybrid solutions," he said. "Companies will offer a
combination of hosted and on-premises software."

Salesforce.com's IPO is just business as usual for Siebel. "Let's put
this in perspective," Rubin said. "The amount of money they'll generate from
an IPO is less than what we generate every single quarter; last quarter, the
number of users we added overall was almost twice as many as they have added
in their entire corporate history. Hey, welcome to the party, guys, but this
really doesn't change anything."

Now may be the time for small, nimble on-demand companies to shine, but
this sector may be subject to the same consolidation as any other segment.
In a recent survey of IT and business decision-makers by Summit Strategies,
analyst Tom Kucharvy found high recognition and acceptance of the
software-as-service model, with small to mid-sized companies most interested
in deploying it. (This survey lumped together vendors offering their own
applications and hosts of third-party apps.)

But when asked which companies would be a favored source for on-demand
applications, independent companies like salesforce.com were way down the
list. These executives' top choices were Microsoft and IBM. IBM has spent
millions of dollars advertising its On Demand offerings, but Microsoft
doesn't provide any software this way.

The results show two things, according to Kucharvy. "We want somebody
we're sure is going to be around, somebody that's reliable, in whom we can
have long-term confidence," he said. "Second, customers like one vendor
offering an integrated environment, rather than a single solution -- things
that are more tied together. But a suite offering from an independent means
it's inherently going to be for a much smaller business and not able to
address the comprehensive needs of a larger business."

That suite spot could make salesforce.com and its brethren little
boats in the big pond of enterprise software. The IPO could tell whether that idea sinks or swims.